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Working Papers

Elderly couple researching pension options

Monisankar Bishnu, Shresth Garg, Tishara Garg and Tridip Ray

Abstract:In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via pay-as-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically ecient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or socio-political factors.

Keywords: Public education; PAYG pension; intergenerational transfers; welfare state

CEPAR industry report

Joydeep Bhattacharya, Monisankar Bishnu and Min Wang

Abstract: This paper studies the welfare of time-inconsistent, partially sophisticated agents living un- der two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the aca- demic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time- inconsistent agents economize on the costs of private commitment provision.

Keywords: endogenous borrowing constraints, overborrowing, financial protection




Olivia S. Mitchell

Abstract: In the wake of the global pandemic known as COVID-19, retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging. This paper offers an assessment of the status quo prior to the spread of the coronavirus, evaluates how retirement systems are faring in the wake of the shock. Next we examine insurance and financial market products that may render retirement systems more resilient for the world’s aging population. Finally, potential roles for policymakers are evaluated.

Keywords: COVID-19, retirement, financial market, aging population

Policy Dialogue

Michael Keane and Timothy Neal

Abstract: We develop an econometric model of consumer panic (or panic buying) during the COVID-19 pandemic. Using Google search data on relevant keywords, we construct a daily index of consumer panic for 54 countries from January to late April 2020. We also assemble data on government policy announcements and daily COVID-19 cases for all countries. Our panic index reveals widespread consumer panic in most countries, primarily during March, but with significant variation in the timing and severity of panic between countries. Our model implies that both domestic and world virus transmission contribute significantly to consumer panic. But government policy is also important: Internal movement restrictions - whether announced by domestic or foreign governments - generate substantial short run panic that largely vanishes in a week to ten days. Internal movement early in the pandemic generated more panic than those announced later. In contrast, travel restrictions and stimulus announcements had little impact on consumer panic. 

Keywords: Coronavirus, Hoarding, Consumption, Panel Data, Containment Policy 


Aged care support

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp 

Abstract: We study stated preferences for long-term care insurance that pays income instead of reimbursing formal care costs. Our results show that long-term care income insurance is likely to provide two important benefits to aging societies. First, it can facilitate flexible, informal, long-term care - seniors who plan to rely on family members for extensive care find income insurance particularly attractive. Second, it can enhance risk-pooling - if long-term care income insurance were available, many seniors would release funds set aside to self-insure long-term care risk and purchase additional longevity insurance. Our results rule out adverse selection into the long-term care income insurance product on objective risk factors but show both adverse and advantageous selection effects on private information. We conclude that a flexible insurance product that supports informal care has both demand- and supply-side advantages over typical expense-reimbursement cover.

Keywords: Long-term care insurance; aged care; informal care; retirement incomes; annuity demand, online experiment.

Pension finances

James Mahmud Rice, Jeromey B. Temple and Peter F. McDonald

Abstract: Inequality between generations is a central feature of human societies. Moreover, many institutions have developed within human societies that mould and shape intergenerational inequality, including the state. Nevertheless, intergenerational inequality remains ill-defined as a concept and is rarely directly measured empirically. This paper examines intergenerational inequality – in particular, intergenerational inequality in income. In order to provide greater definition to the concept of intergenerational inequality, the paper introduces a new measure of intergenerational inequality: the IGI index. With this new index added to its methodological toolkit, the paper examines the empirical evidence on intergenerational inequality in income, as well as how the state works to alter intergenerational inequality through the redistributive effect of public transfers. The empirical evidence examined is drawn from the recently developed Australian National Transfer Accounts, which include data on the incomes and public transfers paid and received by different ages and generations in Australia during the 28-year time period between 1981–82 and 2009–10. The analyses presented suggest that there are substantial inequalities in the incomes received by different generations, with earlier generations generally receiving less income in real terms over their lifetimes than later generations. As the state has operated through time – receiving public transfers from some individuals and paying public transfers to others – it has worked to increase intergenerational inequality. This implies that the state has worked to decrease the incomes of earlier generations relative to those of later generations. In this way, the state could be described as exhibiting a bias in favour of later generations.

Keywords: Australia, government, income, inequality, intergenerational transfers, life cycle



Federal Budget

Bruce Chapman and John Piggott

Abstract: The JobKeeper scheme aims to provide financial assistance to those in danger of being laid off, and to assist business to stay afloat until more familiar economic and employment activity resumes. In financial terms, it is very significant: relative to population and GDP, it is the largest wage-subsidy scheme in the world. A critical issue, not so far addressed in public discussion, is how the initiative might be phased out when the economy recovers, in a way that facilitates the survival of business while at the same time minimising further fiscal outlays, and avoiding continuing to subsidise businesses that may not in normal times be viable.

This short paper addresses the question of how the JobKeeper program might be wound down at the end of its full subsidy term.

Keywords: Jobkeeper, debt model, COVID-19, policy structure, financial assistance


Policy Dialogue

Weifeng Liu

Abstract: Per capita carbon emissions are an important concept in international negotiations of climate policies and also in future projections of aggregate carbon emissions. This paper argues that the convergence studies on per capita carbon emissions in the literature are theoretically biased because demographic structure is not considered. The paper therefore links demographic change to carbon convergence analysis and examines historical convergence of per capita carbon emissions for a global sample of countries over the period of 1960-2014. The results show that although demographic structure does not change the existence of carbon convergence, the growth of worker shares is significant in most estimations in this paper, and it also affects the estimates of the convergence speed. The time period of empirical analysis also matters for the convergence results. The paper further extends the IPAT identity by introducing demographic structure as well as economic and energy structure, and argues that the convergence of per capita carbon emissions depends on the convergence of each component, and each component may converge within different time horizons. The paper proposes that emissions rights should be allocated across countries based on a mix of long-term, medium-term and short-term rules.

Keywords: Demographic change, carbon emissions, climate change, convergence analysis, IPAT



Australian currency

Weifeng Liu and Warwick McKibbin

Abstract: The world will experience dramatic demographic change over this century. This paper examines the impacts of this global demographic change on the Australian economy at both the aggregate and sectoral levels in a global multi-region and multi-sector general equilibrium model. Using a detailed structural model, we simulate demographic shocks of six regions in the world economy as well as Australian own demographic shock to investigate their impacts on Australian macroeconomic conditions, economic structure and trade patterns. The results suggest that demographic change in different regions of the world economy will have different impacts on sectors in Australia depending on trade patterns between Australia and other regions and also between other regions. The energy, mining and durable manufacturing sectors in Australia are the most affected. Demographic change in China, Japan and Korea has significant negative impacts on Australia, but partly offsetting these shocks are positive demographic shocks from emerging Asia. The overall impact of the rest of the world on Australian GDP is quantitatively negligible, but the impacts on the real interest rate and trade balances are significant. Global demographic change increases Australian real interest rates in the next two decades on the assumption that emerging countries can access global capital markets and take advantage of their demographic dividends.

Keywords: Global demographic change, Australian economy, international trade, international capital flows, DSGE, CGE, heterogeneous agents, G-Cubed